Asian shares sell off as risk sentiment sours, pound pares gains

A man looks at a stock quotation board outside a brokerage in Tokyo, Japan, April 18, 2016. Reuters/Files

Asian stocks skidded on Monday as fears of faster rate hikes in the United States and uncertainty around the Sino-US trade war deterred investment in riskier assets, while sterling briefly jumped to a two-week high on hopes of an orderly Brexit.

Markets are expected to be skittish ahead of US congressional midterm elections on Tuesday.

Opinion polls show a strong chance that the Democratic Party could win control of the House of Representatives after two years of wielding no practical political power in Washington, with President Donald Trump’s Republican Party likely to hold the Senate.

Spreadbetters point to a subdued start for Europe with both London's FTSE .FTSE and Germany Dax .GDAXI seen opening lower.

US stock futures slipped 0.3 per cent ESc1 1YMc1 after Wall Street closed lower on Friday amid concerns a trade deal between the United States and China may not be struck soon.

“We expect US-China trade tensions to get worse before they get better,” Citi analysts said in a note.

“Although trade growth has held steady, concerns are rising in business surveys,” they added.

“Equity markets do not seem to be fully incorporating the risks of an escalation of tensions yet, which could have an effect on investment, sentiment, inflation, and growth.”

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS lost 1.4 per cent on Monday, slipping back towards last week’s 1-1/2 year trough of 505.61 points.

Chinese shares opened in the red with blue-chip stocks .CSI300 off 1.2 per cent as President Xi Jinping acknowledged conditions abroad had created some challenges for the Chinese economy.

Xi, however, promised to lower import tariffs and continue to broaden market access.

Also clouding the outlook for world shares is the prospect of even tighter monetary policy in the United States, given robust economic data in recent months.

The United States reported solid jobs growth for October, with annual wage gains at 9-1/2-year highs, further boosting expectations for a December rate rise.

A similarly upbeat number back in February had sent global financial markets in a tailspin with a massive sell-off in bonds and equities, particularly in emerging markets, and a strong rally in the US dollar.

Markets are now pricing in a higher probability of a December rate hike with further tightening to 2.75-3.00 per cent seen through 2019.

“The US employment report supports our view that the Federal Reserve will raise rates three more times from now until mid-2019,” Capital Economics said in a note.

“After that, we suspect that the cumulative effect of monetary policy tightening will start taking a toll on the US economy, forcing the Fed to end its tightening cycle and pulling Treasury yields, the US stock market, and the dollar down.”

STERLING SHINES

Sterling briefly jumped to a two-week high on Monday on growing hopes of a smooth Brexit.

With just five months to go until Britain exits the European Union divorce talks are at an impasse, a Sunday Times report that an all-UK customs deal will be written into the agreement governing Britain's withdrawal from the European Union was enough to send the pound GBP= to $1.3062, its highest since October 22.

May’s office said the Sunday Times report was speculative, but added that 95 per cent of the withdrawal agreement was settled and negotiations were ongoing.

The pound pared gains to be last up 0.1 per cent at $1.2989 after UK’s Telegraph newspaper reported significant hurdles still remain in the Brexit negotiation process.

The US dollar struggled on Friday. The dollar index .DXY, which measures the greenback against a basket of major currencies, was last off 0.1 per cent at 96.459, according to Reuters news agency.

Against the safe haven yen, the dollar held at 113.25 JPY=. The euro was flat at $1.1389 EUR=.

In commodities, oil prices fell as the start to US sanctions against Iran’s fuel exports was softened by waivers that will allow some countries to still import Iranian crude, at least temporarily. [O/R]

US crude CLcv1 fell 36 cents to $62.78 per barrel and Brent LCOcv1 was last at $72.49, down 34 cents.

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